Macroeconomics Developments

Mitigating the effects of the failed forex inflows due to poor tobacco sales, Malawi has been blessed with the granting of fresh loans alongside the relief of debt it contracted sometime back.

Malawi has been relieved of at least US$100 million it would have spent on servicing external debt for a period of 20 consecutive years. The relief falls under the enhanced initiative for Highly Indebted Poor Countries (HIPC). The resultant annual savings for Malawi equate to 2.5% of the country's annual gross domestic product.

For a country like Malawi, whose total gross foreign reserves fluctuated around US$201 million (sufficient for import cover of around 3.4 months) since October 2000, it means, ceteris paribus, a substantial increase in import cover. The improvement in import cover should in turn help stabilize exchange rates, which have in the past year soared even during the tobacco season. The tobacco season started in April when the US$: MKw rate was 1:47.03; by the end of December 2000 it was 1:80.4, registering a depreciation rate of 71%. We should therefore anticipate a more stabilized exchange rate in the near future. Admittedly, some of the savings are also to be routed directly into poverty alleviation programs under the terms of HIPC but this is still a big boost for Malawi.

The IMF and the World Bank have also offered generous credit facilities to Malawi. The former's facility is a circa US$58 million loan under the Poverty Reduction and Growth Facility to sustain structural and economic reforms, while the latter's facility is a US$55 million credit support loan (for balance of payments requirements).

These loan facilities have come at the right time when there has been increased domestic borrowing by government. For the last quarter of the year 2000 the government auctioned on average K310 million worth of T-bills per fortnight, and has continued doing so in the New Year. This has pushed up yield rates for T-bills. For example, 271-days tenor bills average yield rose to 84.93% on 5th January this year from 52.10% recorded early December last year, registering a 63% increase.

These increases in T-bills yield rates have subsequently seen the central bank raising its bank rate (i.e. the rate at which commercial banks borrow from the Central Bank) to 61.29%, a 22% increase on top of the earlier 12.9% on December 4, 2000. Some commercial banks have followed suit, adjusting their base lending rates to 62.5% on average.

These exorbitant rates may choke the already struggling private sector, as the gross margins on their operations are unlikely to be able to fully support such finance charges.

However, the granting of the two external loans should help lower interest rates, though not necessarily within the immediate future. Domestic borrowing by government is likely to decrease over time since the loans will cover part of the amounts that were being financed through domestic borrowing. As a result, the private sector should see a reduction in the "crowding out" effect of the domestic borrowing.

INTEREST AND EXCHANGE RATES

On the foreign exchange markets, the Kwacha has stabilized against both the US Dollar and Zimbabwe Dollar. Against the US Dollar, the Kwacha has been at 80.3575, and 1.6032 against the Zimbabwe Dollar, both since December last year.

The US Dollar's case is due to the simple demand and supply factors, while that of Zimbabwe is due to the fact that the rate is fixed by the Zimbabwe Central Bank. Since the high T-Bills yield rates have attracted much of the local currency from the system, there is relatively insufficient local currency to chase the US Dollar. As a result, institutions such as the central bank and exporters are willing to sell their Dollars in exchange for the scarce local currency at relatively affordable rates.

However the South African Rand has experienced significant fluctuations recently. This is purely as a result of international market forces. The recent strengthening of the Euro should continue to weaken the Rand thereby exerting pressure which should result in an appreciation of the Kwacha against the Rand.

Though there are prospects that interest rates may lower in the medium-to-long term, the market should continue to expect possible further hikes in shorter tenor T-bills. Judging from the movement of 271-days tenor T-Bills yield rate (depicted by the graph below), the tenor whose last 4-moving average yield rates determine the RBM's bank rate, we may still see a rise in lending rates (or at least no significant reduction in lending) in the short term.